Foreign Firms Find Russia's New Tax Plan Major Obstacle

By
Wendy Sloane, Special to The Christian Science Monitor /
April 1, 1994

MOSCOW

FOR American businesspeople contemplating investment in Russia, the biggest obstacles are not the ones you would expect - coups, communism, and corruption. Instead, they voice a more familiar complaint: taxes.

``Russia will have to change its taxation policies,'' says Robert Tornstrom of Occidental Petroleum. ``Otherwise they will discourage not only foreign investors to the point where they won't come and invest money, but they're also going to bankrupt their own domestic industry.''

He says Occidental receives $3 a barrel from Russia for oil extracted here, and then gets slapped with a crippling $4.50 tax for every barrel exported, so that sales do not cover production costs. ``The policies are not consistent,'' he says. ``They're not uniform, and for those of us who are investing here, they oftentimes seem arbitrary and capricious.''

A group of top business executives from 28 major American companies accompanying US Commerce Secretary Ron Brown during a week-long visit here complained in conversations at dinners and receptions this week that Russia's contradictory taxation system posed the biggest impediment to US investment. The visit resulted from Clinton-Yeltsin summit talks in January.

In some cases, deals already approved by both sides had stalled or been canceled.

In his role as America's First Salesman, Secretary Brown spent much of his time in Moscow lobbying the government to reduce taxes and duties before he left Thursday for Yekaterinburg and St. Petersburg. But after three days of talks with top officials, including President Boris Yeltsin and Prime Minister Viktor Chernomyrdin, Brown emerged claiming only small victories.

Apart from signing four economic-cooperation agreements, he won government assurance that new import tariffs imposed March 15 would be cut and deals negotiated by foreign firms before that date would be exempted.

The tariffs impose duties of up to 100 percent on imported goods, including a 15 percent tariff on food imports, aimed at protecting domestic industry. They represent the biggest change in government policy since key reformers, such as former deputy prime minister Yegor Gaidar and former finance minister Boris Fyodorov, resigned in January.

``Taxes are making businesses very hesitant to come here and make investments. Many people have had the experience of coming here and having their taxes raised sky-high, and it's driving people away,'' says Max Dajnowicz, a vice president of General Motors Overseas Corporation.

A 90 percent import tariff on automobiles last year jumped from 140 percent in February to 160 percent this month, he says, while Ladas exported to the United States face only a 3 percent levy. ``They say they're doing this to protect local industry, but they're selling all they make anyway.''

Chernomyrdin, who agreed to grant tariff breaks following talks with Brown, had been under increasing pressure from Yeltsin and others. The staunchest proponent of the hike has been Deputy Prime Minister Alexander Zaveryukha, head of the powerful agriculture lobby, who said they protect consumers from ``low quality and therefore cheap products.''

Chernomyrdin's promise to grant exemptions gave the green light to a deal for Aeroflot international airlines to lease several Boeing 767-300 ER jets. The deal was announced last month but postponed over Russian worries over their costs.

Another breakthrough was approval of the $10 billion Sakhalin-2 deal with Exxon to boost development of the Sakhalin seabed in the Far East. US investment, which totaled $1 billion last year, could soon top $50 billion, Brown predicted.

But since the government stopped short of completely rescinding the tariffs, the future is unclear. Following approval from the International Monetary Fund to grant Russia a $1.5 billion loan, it has been seeking quick solutions to finance its budget deficit.

``It's totally discouraging. It will kill business,'' says John Bailey of Johnson &amp; Johnson. ``It won't take much longer before some of us will start really seriously considering whether we stay or go.'' James Tilley, a vice president of Conoco International Petroleum and the American Chamber of Commerce's president here, says he knows of at least 19 small business that recently pulled out of Russia.

Taxes can be so astronomical it is cheaper to import finished products than raw materials. ``Some of the taxes are counterproductive to Russia's interests,'' says Joe Condon, the chamber's executive director.

Mr. Fyodorov says a complete overhaul of the tax system is needed. ``But I doubt very much Chernomyrdin will do that,'' he said in an interview. ``First, he doesn't really understand things. Second, he's so focused on short-term survival he doesn't have time for strategic things.''

Russia, plagued by rumors of an impending coup, had no real taxation system until recently. Along with new ``tax police,'' it has imposed new duties, including a 60 percent duty on household goods when foreigners ship them home.

Federal Tax Service head Vladimir Zverkhovsky this week proposed simplifying the tax system for Russians. A list of 21 local taxes deemed unnecessary include a tax imposed on companies that use the word ``Russia'' or ``Russian Federation'' in their logos, and a pet tax.